Rhode Island-Style Economic Development’s Inevitable Failure

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Put aside any partisan — or individual-politician — loyalty.  Clark Judge offers a valuable lesson for Rhode Island in his recent Wall Street Journal article, “The Rust Belt Is Right to Blame Obama“:

First, and no surprise here: From 2010-15 regulatory risk jumped—an average increase across all industries of 79%.

Second, and more surprising: As regulatory risk climbed, annual capital expenditures fell, a total drop of nearly $32 billion when comparing 2010 to 2015. This negative relationship was strong across the board, but it was statistically tightest for “industrials” (heavy manufacturing plus railroads and airlines).

Third, as regulatory risks grew and capital expenditures shrank, major corporations also cut jobs by more than 1.1 million. Among the biggest losers were heavy manufacturing, airlines, railroads, information technology and consumer products—America’s industrial core.

Fourth, while the business of making things and moving them to market was eroding, the value of gaming the government increased. The Vogel and Hood team constructed two trial portfolios composed solely of companies that ranked high in lobbying strength. From 2010-16 these portfolios outperformed the S&P 500 by 22% and 27%.

In short, with the expanded reach of regulation (as well as the increased propensity to continue that expansion), companies stop investing in their businesses, both their capital and their labor, and focus attention increasingly on getting government to help them out.  This has obvious benefits for elected and appointed government officials, and it has benefits for established companies that game the government in a way that hobbles their competition.  But it hurts everybody else, from entrepreneurs to workers, and leads to inevitable decline.

This dynamic covers regulation, taxation, and even the Raimondo-esque corporate welfare programs that compensate politically favored companies for the inconvenience of doing business here, and it’s an across-the-board failure.  Not only are more-innovative companies washed out, but the companies that survive produce less and innovate less, because they’re focused too much on redistribution.

Forcing our elected officials to get us off this one-wheeled bandwagon — focusing instead on family prosperity — should be Rhode Islanders’ resolution for the new year.



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